Cable gobbles up phone customers

Analysis: Battle with phone industry to intensify in 2007

WASHINGTON (MarketWatch) - Comcast Corp. and other cable companies continue to take a bite out of the phone business of Verizon Communications Inc.

Verizon is hoping the fight won't be so one-sided later this year as it ramps up its high-speed voice and data service for homes.

During the fourth quarter, Comcast added more than a half-million customers to its Internet-based digital phone service to bring its year-end total to 1.9 million, more than three-fourths of whom signed up in 2006. In early January, Comcast passed the 2-million mark.

Comcast grew its phone business steadily throughout 2006, adding 211,00 digital voice customers in the first quarter, 306,000 in the second, 483,000 in the third and 508,000 in the fourth. And voice revenue almost reached $1 billion in the quarter.

A sizable chunk likely came out of the hide of Verizon. About one-third of the company's Northeastern territory overlaps with Comcast
CMCSK
New York-based Cablevision Systems Corp.
CVC, -1.86%
with more than 1.1 million phone customers, has also been gaining at Verizon's expense. Cablevision reports results later this month.

Pressured by cable operators, Verizon last week reported a nearly 730,000 sequential decline in residential access lines in the fourth quarter compared to the third quarter. The company also lost about 850,000 lines in both the second and third quarters of 2006 and 680,000 in last year's first quarter.

Verizon
VZ, +0.82%
finished 2006 with 27.79 million residential lines, down 10% from 30.90 million at the end of 2005.

Reversing the tide

Despite those losses, Verizon executives believe the decline will start to taper off by late 2007 as the company makes it new television service, known as FIOS, available to millions of additional households.

"Our goal is less overall line loss in 2007 than we saw in 2006," said Verizon Chief Operating Officer Denny Strigl last week after fourth-quarter results were issued. "FIOS will of course increasingly help, particularly in the second half of the year as we gain some scale."

Verizon is spending more than $18 billion to build a fiber network offering the nation's fastest Internet connections and a full-fledged pay-TV service similar to cable. The company hopes its fiber services will entice its best customers to stay and attractive some it's already lost.

So far, Verizon hasn't made a big dent in the TV market, largely because it's available to so few homes. The company ended 2006 with 207,000 video customers, with about two-thirds switching from cable, Verizon executives say.

As such, Verizon probably took no more than 40,000 TV customers away from Comcast in 2006. That's a drop in the bucket for the cable giant, which serves more than 24 million cable viewers.

Verizon, however, plans to make its TV service available to more than 5 million households in 2007, so pressure on Comcast and especially Cablevision is expected to increase.

"With [Verizon and AT&T] getting into video, the landscape will get more competitive in the future," acknowledged Steve Burke, chief operating officer of Comcast Cable, in a conference call Thursday.

Indeed, Verizon is evidently comfortable enough with its strategy vs. cable rivals that the company has raised prices on some basic phone and high-speed Internet plans.

"I think if you compare [our prices] to any other offer, any other cable modem offer, we're still at the low end," Verizon Chief Financial Officer Doreen Toben said last week.

Gung-ho at Comcast

Comcast, for its part, expects millions of customers to sign up for its phone service over the next few years. In 2007, executives say they expect to surpass the 1.5 million digital voice subscribers obtained in 2006, the first year of a broad marketing push.

Verizon executives insist that most of their own customers who've switched to cable are off-and-on subscribers often attracted to cut-rate deals offered by new entrants into the phone market.

Every time major new competitors appear, Verizon executives say, they see a temporary surge of customers switching to those providers.

So far, Verizon has managed to offset the persistent decline in local phone lines by adding more wireless and high-speed Internet accounts. From that perspective, the company's total number of connections with customers has actually grown in recent quarters.

Still, the steady loss of local lines worries investors. They hope to seen evidence later in 2007 that Verizon is managing to stem the tide.

Comcast executives, while quite confident, don't plan to let up on Verizon or other phone companies. The cable operator said Thursday it plans to allot about $5.7 billion for capital expenditures in 2007, well above Wall Street forecasts.

Among other things, Comcast's aim is to increase the number of households eligible for digital phone service to 80% from a current rate of 60%.

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